Friday, 15 February 2013

Lessons to be learnt?

Will things be different the next time around?

Booms and busts are an
inevitable but undesirable element of a capitalist economy.The current slump in the global economy is a
harsh reminder of what can happen after the good times end.Recessions following financial crises are particularly
severe as a loss in confidence in the banking system leads to the wheels of finance
seizing up.The current stagnation in
the global economy and the resulting economic suffering would suggest the
potential for the collective will to push to apply the lessons that have been
learnt in the aftermath of the financial crisis.However, what is plausible in theory may
prove difficult to implement in practice when the economy is growing again and
the recession seems far off.

Favourable
circumstances enable a quicker pace of economic growth and help to spur on
investment in a range of new technological and business fields.Yet amongst this, inefficient and nonviable
companies will also prosper and increased competition for resources will push
up prices for labour and materials which acts as a brake on growth.The slowdown as part of the business cycle is
necessary as it helps to weed out the weaker companies and free up resources
for the stronger businesses.

There seems to be
links between the boom time and the recessions that follow – the excesses which
are generated amid rapid economic expansions have to be purged before the
economy can begin to grow again.The
length and pace of the economic growth can be interrelated to the scale of the
problems that are created during the good times and these have to be dealt with
before growth can resume. Excessive
lending both fuelled the surge in growth and also has hampered the economic
recovery with both households and government weighed down by too much debt.More restrained growth could in theory result
in more temperate slowdowns.

Therefore, it would be
preferable for the governments and central banks (who control fiscal and
monetary policy) to be more aggressive in moderating periods of expansion so as
to limit the extent to which problems can build up.Your Neighbourhood Economist would argue that
the Eurozone crisis, high unemployment, and weak growth is too much of a price
to pay for the previous lending binge and that governments and central banks need
to be more alert to excesses which amass during rapid economic growth.An assortment of measures such as higher
interest rates, lower government spending, and specific policies to lower
borrowing need to be considered as the economy approaches the top of the
business cycle.

Yet, politicians would
loathe being the ones to turn off the party music and put an end to the
economic good times by popping the balloons.Voters could instead be easily persuaded to vote for a party who would
permit a higher level of growth.There
is also the possibility of hubris – it was Gordon Brown, the chancellor of the
government in the UK, who infamously claimed that his government had put an end
to boom and bust.Even the conservative
types in central banks want to court controversy by limiting economic
expansions.Even Alan Greenspan who was
revered during his stint as the head of the Federal Reserve in the United
States believed that it was not the role of the central bank to pop a bubble
but only to deal with the consequences afterwards.

The argument for
moderating growth over the business cycle is easy to make when the economy is
in the doldrums but the timing and policies required will be more difficult to
judge and find support for when the economy is roaring.This problem is made even trickier by what
seems to be a form of collective amnesia that takes hold during the good
times.Rather than remembering back to
the previous boom and bust, even the most brilliant of minds tend to get caught
up in the euphoria.There is also
typically a story to back up why this time is different –whether it be the
potential of the internet during the surge in popularity in tech stocks or the
steady hand of central banks and new financial wizardry in the lead up to the
current bust.

So it remains to be
seen whether the leaders across the globe will apply the lessons from the past
five years and whether voters will enable them to do so.History suggests not.But perhaps an even more depressing thought
is that, even if there is sufficient commitment to apply
the lessons, high levels of debt in developed countries and better prospects
for investment elsewhere may mean that a level of growth where the policies
above are required may not be reached for a long time (if ever).